Buying a Short Sale
- April 2, 2010 - by Ben Goheen, in General, with no comments -
If you're considering buying a home, you've probably heard the term 'short sale.' The process of buying a short sale differs from a traditional sale and has both advantages and disadvantages.
If you’re considering buying a home, you’ve probably heard the term ‘short sale.’ The process of buying a short sale differs from a traditional sale and has both advantages and disadvantages.
What is a short sale?
A short sale is when a home is sold for less than the remaining loan amount. This is an option for homeowners who are struggling to pay their mortgage and want to avoid foreclosure. Since the home is being sold for less then the remaining loan amount, the offer accepted by the seller must also be approved by the lender. Here’s an example:
John bought a house in 2006 for $200,000 and had 20% down ($40,000) so he took out a mortgage for the remaining $160,000. Not much principal has been paid down in 4 years so he still owes nearly $160k. Now John wants to sell but properties in his neighborhood are selling for around $120,000. If he sells his house for $120k and still owes about $160k, he either has to write a check for the remaining $40,000 or do a short sale – sell it for less than the remaining loan amount
No two short sales are similar
Since offers have to be accepted by the seller and their lender, response time can vary greatly – from a couple days to several months. Plus there is no guarantee the offer will be accepted by the lender. If the seller has two mortgages it can take even longer since all lenders have to accept the offer.
Does the Realtor have experience?
The seller’s agent submits the offer to the lender and handles negotiations. So if the agent has experience dealing with short sales it will likely help the process move along easier.
Research the seller
See if seller has provided their agent with the complete short sale package, including a notarized letter that allows potential buyers to review the property and loan information. A short sale will be delayed if the required documents aren’t ready when you make an offer. Some sellers can be slow to provide these documents, or may not even know they’re required. But a lender will not review an offer without them.
Research the property
Understand how much is owed to the lender, the loan type and if there are any liens. This will help you anticipate the time frame and likelihood of your offer being accepted.
Make an offer
Assuming the seller accepts your offer, keep in mind the lender also has to approve the offer. Lenders will expect you to be preapproved and provide earnest money. Also, short sales are generally sold “as is” which means no repairs will be made to the home by the lender. It is still important to have a home inspection, so make your offer contingent on having a home inspection after the offer is accepted. Remember a response can take several weeks or months. The seller’s agent should be able to provide you with regular updates on the status of your offer.
Prepare for closing
If your offer is accepted, the lender will provide a letter stating the purchase price and any remaining liens. Buyers are usually given 30 days to close. Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender’s desk, the lender can attempt to change the terms of the contract. Also the seller still has the right to reject the offer after the lender accepts it.